Minter Ellison Alert | Fair Entitlements Guarantee Bill introduced

25 October 2012

On 11 October 2012 the Government introduced the Fair Entitlements Guarantee Bill. If passed, this Act will replace the current General Employee Entitlements and Redundancy Scheme (GEERS), an administrative arrangement which provides advances to employees to cover unpaid entitlements where their employer becomes insolvent or bankrupt. The Fair Entitlements Guarantee Act will enshrine this right to payment in legislation, and strengthen it in certain respects.

Background

The Fair Entitlements Guarantee Bill reflects the Government’s election commitment contained in its Protecting Workers' Entitlements package announced in July 2010. The package was designed to better protect the entitlements of Australian workers impacted by the liquidation or bankruptcy of their employer. As well as the Fair Entitlements Guarantee introduced by this legislation, the package comprised two other components. The first of these, strengthening compliance measures to ensure employees receive their superannuation entitlements, is the subject of the current Securing Super reform process.

The second involved strengthening corporate law and tax law to give ASIC increased powers and to strengthen penalties where companies attempt to avoid paying workers entitlements, in particular through ‘phoenixing’. These measures have already been introduced through a number of legislative reforms (see our previous Alerts, listed below). This Alert focuses on the Fair Entitlements Guarantee. However, by putting the former GEERS onto a more secure footing, this current legislation dovetails with the various phoenixing reforms because those reforms are partly designed to allow quicker access to employment entitlements currently covered by GEERS.

GEERS

GEERS was introduced by the Howard government. It operates as a basic payment scheme to assist employees who have lost their employment due to the liquidation or bankruptcy of their employer, where there are no other funds available to pay those amounts. Employers retain prime responsibility for payment, and the government’s right to recover amounts it pays from any funds that later become available is fully protected.

A problem with GEERS is that, like the national school chaplaincy scheme which was recently found to be unconstitutional by the High Court (Williams v Commonwealth of Australia [2012] HCA 23), there is no legislative basis for GEERS. It is simply an administration arrangement operated by the Department of Education, Employment and Workplace Relations in accordance with the GEERS Operating Arrangements (OAs). Not only is it fairly easy for the government to amend or dismantle the scheme; its validity is in theory subject to the threat of legal challenge.

The government also claims that GEERS has a number of other weaknesses, which it says have been addressed by the Fair Entitlements Guarantee Bill. That being said, the mechanisms in the Bill follow closely those of GEERS. We expect that in practice the differences will be hard to discern.

The Bill

Like GEERS, the Bill’s two main objectives (under s3) are:

  • first, to provide for the Commonwealth to pay advances on account of unpaid employment entitlements of former employees where:
    • the employers are insolvent or bankrupt;
    • the end of the employment of the former employees was connected with that insolvency or bankruptcy; and
    • the former employees cannot get payment of the entitlements from other sources; and
  • second, to allow the Commonwealth to recover the advances through the winding up or bankruptcy of the employers, and from other payments the former employees receive for the entitlements.

However the operation of the Fair Entitlements Guarantee differs in some respects from GEERS. The following is a summary of some of the main provisions of the Bill, and where they differ from GEERS.

Eligibility

Part 2 of the Bill deals with eligibility. Under s10, a person is eligible for an advance if:

  • the person’s employment has ended;
  • an insolvency event has happened to the employer;
  • the end of the employment was due to the insolvency event, or occurred less than 6 months before the appointment of an insolvency practitioner, or occurred on or after the appointment of an insolvency practitioner; and
  • the person is owed debts attributable to employment entitlements.

‘Insolvency event’ is defined in the Bill as the appointment of a liquidator under the Corporations Act 2001 or the bankruptcy of the employer under the Bankruptcy Act 1966 (or in the case of a partnership, either happens to all of the partners).

‘Insolvency practitioner’ is defined as a liquidator, administrator, receiver of property, a person who has possession or control of property of the employer for the purpose of enforcing a charge, mortgage, lien, pledge or a security interest, or a bankruptcy trustee.

These provisions broadly reflect the GEERS OAs, however the ‘end of employment’ provisions in the third bullet point above are slightly wider than the equivalent under GEERS. By comparison, GEERS (clause 6 and 7) requires the employment to have been terminated due to the appointment of an insolvency practitioner, for the claimant to have resigned following the appointment of an insolvency practitioner, for the claimant to have resigned or their employment to have been terminated up to 6 months before the appointment of the insolvency practitioner, or the employment to have been terminated before the appointment of an insolvency practitioner but reinstated by a court or tribunal.

Under GEERS, provision was made for the decision-maker to determine that the scheme may apply in 'extraordinary circumstances' where the insolvency of the employer was being conducted under an Australian law, other than the Corporations Act 2001 or Bankruptcy Act 1966. This is not taken up in the Bill, albeit we doubt this will be material, as it is unclear whether and in what circumstances this discretion has been invoked.

Again broadly reflecting GEERS, s10 of the Bill provides that the claimant must have taken reasonable steps to prove the employment debts in the winding up or bankruptcy of the employer, or where relevant to have recovered them before the insolvency event occurred. The Explanatory Memorandum suggests that this ‘reasonable steps’ requirement will not impose a high standard on employees.

A claimant must be an Australian citizen or the holder of a permanent visa or a special category visa at the time the employment ended. This is slightly more onerous than the equivalent GEERS provision, which requires a claimant to be entitled to reside permanently in Australia, without saying at what point in time the test must be met.

Under s11, s12 and s13 of the Bill certain employees are excluded.

Section 11 excludes individuals who are an ‘excluded employee’ for the purposes of the Corporations Act. This includes an employee who, at any time in the 12 months before the winding up, was a director, spouse of a director or a relative of a director of the employer. A similar provision is included for bankrupt employers. This reflects the current exclusion in GEERS (which has been criticised for excluding normal ‘mum and dad’ directors and their relations from the entitlement scheme).

Under s12, employees are also excluded if they are newly employed after working as a contractor where certain conditions apply. This exclusion, which was not in GEERS in such express terms, seems to be aimed at preventing manipulation of the scheme to include contractors who would not otherwise be covered (compare s25, below, which prevents artificial inflation of entitlements).

As with GEERS, under s14 the claim must be made no later than 12 months after the later of the insolvency event and the end of the person’s employment. However, if the employer is or was a bankrupt, the claim must be or have been made before the discharge of the employer’s bankruptcy.

Like GEERS, the Fair Work Guarantee does not cover contractors (according to the Explanatory Memorandum), but only applies to employees at common law. However, as discussed below, under the Bill there is some additional flexibility to extend the scheme to people who are not ‘employed.’ In contrast with GEERS, there is no definition of employee in the Bill.

The Bill does not include an equivalent to the GEERS provision that claimants lose eligibility if they do not provide information within 28 days of any request.

The Fair Entitlements Guarantee and Voluntary Administration

Reflecting GEERS, the definition of 'insolvency event' (above) does not include voluntary administration (VA) or the entry into a deed of company arrangement (DOCA). In the normal case it would be expected that the advance will not be calculated and paid until the creditors in a VA have voted to liquidate the company. However, under s49 the Minister may by instrument declare that the Act does apply in the VA of a particular company when the creditors are expected to vote this way. The declaration can be revoked. Again, this mirrors the way in which GEERS has been operating in practice. Often in complex administrations – especially where a Receiver is also involved - the second meeting is deferred or adjourned for a lengthy period, and yet no DOCA is likely to be proposed. In these cases, employees have been securing early access to the scheme, ahead of the second meeting.

The absence of any provision for payments to be made to employees where the employer is subject to a DOCA (where no Insolvency Event has yet occurred) reflects the logic that the scheme should not be used as a restructuring tool to supplement the funds that might be otherwise available to creditors generally. We note also that the Bill does not repeal or otherwise effect s444DA of the Corporations Act 2001, which requires a DOCA to provide employees with the same level and order of priority to that in liquidation, unless they agree in a separate vote.

The combined effect of these provisions remains, namely that it is very difficult to promote a DOCA which does not secure a full priority dividend to employees, thus hampering the potential effectiveness of a DOCA where entitlements are substantial.

Working out the amount of the advance

Part 3 of the Bill sets out how the advance is worked out. Essentially, this involves calculating the total of the following employment entitlements (subject to the exclusions and reductions described below):

  • annual leave entitlement
  • long service leave entitlement
  • payment in lieu of notice entitlement (not exceeding 5 weeks pay)
  • redundancy payment (not exceeding 4 weeks pay for each full year, plus a pro rata payment for any part year
  • wages entitlement (excluding bonuses, reimbursements or expenses) less PAYG withholding, for the Wages Entitlement Period (up to 13 weeks ending on the earlier of the end of the employment and the first time an insolvency practitioner has power to control or manage employment by the employer),

and as provided by the relevant industrial instrument under which the person is employed.

These employment entitlements mirror GEERS except for two things. First, the redundancy payment under GEERS was capped at 4 weeks. Under the Bill claimants are entitled to the full amount of redundancy they are owed.

Second, under GEERS the wages entitlement period is the three month period prior to the appointment of an Insolvency Practitioner (i.e. under the Bill the period may end earlier).

There is no equivalent in the Bill to clause 8(f) of the OAs, which says that eligible entitlements will not include any entitlements that are attributable to employment after the appointment of an administrator, liquidator or trustee. However, in reality this is not likely to have much significance because wages payable to the employee who remains in employment after an external administrator is appointed are normally paid by the Insolvency Practitioner in the normal course.

Exclusions, reductions and adjustments

The following amounts are excluded from the calculation of the entitlements or reduce the total amount.

  • Under s16, payments in lieu of notice entitlements and redundancy pay entitlements are excluded if the business is transferred to someone else and within 14 days of the end of the person’s employment the transferee offers to employ the person to do similar work on similar terms. Those amounts are revived in certain situations.
  • Under s17, the amount of the advance will be reduced by any amount the person owes to the insolvent employer.
  • Under s18, the amount of the advance may be reduced to nil if the liquidator or bankruptcy trustee expects to have sufficient funds to pay the amount within the next 112 days. If payment is not made with 112 days then the person can apply for review. The Explanatory Memorandum says that it is anticipated this review will be undertaken on the Secretary's initiative.
  • Under s19 the employment entitlements will be reduced by amounts already paid (and which are not costs of the winding up or bankruptcy) or which will be paid (and which are not payable under the Corporations Act in the winding up of the person's employer, under the Bankruptcy Act from the proceeds of the property of the bankrupt employer or under this Act). The Explanatory Memorandum states that this is designed to cover money paid or owed for example by redundancy trusts.

The employment entitlement amounts can also be adjusted as follows.

  • Under s25, to disregard recently agreed changes which improve a person’s terms and conditions. According to the Explanatory Memorandum, s25 is to allow for the 'rare situation' that a person's entitlements are artificially inflated in the knowledge that an insolvency event is likely to occur.
  • Under s26 and s27, to limit entitlements to a maximum weekly wage cap. The maximum weekly is $2,364 (indexed in accordance with s5).

These provisions on the whole mirror GEERS, including the amount of the maximum weekly wage. However, the s19 reduction is in some respects slightly narrower under the Bill – under GEERS the reduction is for any payment in ‘any way connected with’ the claimant's employment.’ Also, the s16 exclusion will end on 1 July 2014, after which eligibility will be determined on the facts and applicable law. In the reading speech for the Bill, the Hon Bill Shorten MP said that this change is designed to simplify the assessment of transfer-of-business arrangements.

In addition, to ‘further reduce complexity,’ the Bill also removes the existing eligibility arrangements under GEERS for employees who are affected by deeds of company arrangement (DOCA) or equivalent bankruptcy proceedings which precede the insolvency event. The second reading speech says that employees ‘often get very little say in how a DOCA is structured and it simply is not fair that they be disadvantaged when they do not work well enough to save their job.’

Payment of the advance

Part 4 deals with the payment of the advance.

Under s28 the advance must be paid to the claimant, to the liquidator or bankruptcy trustee of the employer, or to another person to pass on to the claimant in accordance with a contract between the payee and the Commonwealth. The Explanatory Memorandum says that this will allow the Department to arrange for direct payment where the claim is determined to be ‘low risk and low value’. This therefore allows greater flexibility than GEERS, which only allowed payment through Insolvency Practitioner or through a third party provider. Also, under s 28 the advance may be paid in instalments at the Secretary's discretion if doing so will result in the claimant receiving an instalment sooner than waiting for the whole advance.

Recovery of amounts by the Commonwealth

Part 5 deals with the ability of the Commonwealth to recover amounts (which broadly mirrors GEERS).

Division 1 establishes the framework for recovering money through winding up or bankruptcy proceedings. According to the Explanatory Memorandum, it is intended that the Commonwealth will have the same rights to receive payment from the liquidator or bankruptcy trustee as the employee would be entitled to receive, and that the Commonwealth will stand in the shoes of the employee in exercising rights to priority for payments under the Corporations Act and Bankruptcy Act.

Division 2 allows the Commonwealth to recover money advanced when the employee later receives, from another source, an amount for an employment entitlement that was part of the advance. In that case a debt becomes due by the claimant to the Commonwealth.

Administrative and miscellaneous matters

The Bill makes provision to deal with:

  • the circumstances in which the Secretary may rely on information provided by an insolvency practitioner (s35);
  • procedures for review of decisions regarding the Fair Entitlements Guarantee (ss37-40);
  • the power of the Minister (under s50) to declare by legislative instrument that the Act applies to a specified employer who is under administration prior to liquidation (see our discussion above);
  • s50 permits regulations to be made to establish a scheme for assistance of workers who are not employees (according to the Explanatory Memorandum, this is 'in recognition of the evolving nature of employment relationships').

Conclusion

If passed, this Bill will clarify the current arrangements for the payment of employee entitlements on the insolvency or bankruptcy of their employer, and put those arrangements on a more secure constitutional footing.

From the point of view of employees, more generous provisions relating to redundancy payments and some additional flexibility in relation to payment arrangements will be welcomed. From the point of view of other creditors of the employer, more certainty should also be beneficial.

Our previous Alerts on this topic

Bills to battle phoenix activity released for public comment 
Update on phoenix company law reform
Proposed amendments announced to the existing regime imposing personal liability on directors for certain company tax 

Author(s) Michael Hughes